LNG World Shipping

Where have all the LNG carrier orders gone?

Just two years ago, new LNG carrier orders hit a record 74 vessels. Last year, however, the figure fell to 18 ships and this year has brought just four newbuilding contracts so far.

Shipowner and charterer lack of enthusiasm for new tonnage reflects slack demand for gas amidst the commissioning of new worldscale production plants in Australia and the US, creating an oversupply of shipping tonnage that has driven down spot market freight rates.

Although specialist builders of LNGCs have a comparatively healthy backlog of orders to keep them busy over the short term, they face a dearth of gas carrier work from 2019. A return to a more balanced fleet and renewed and sustained demand for new tonnage may be at least two years away.

Cycles

Like other shipbuilding sectors, LNG vessel construction is cyclical, market vagaries determined by economic and geopolitical upheavals. So far this millennium the worst year for LNGC orders was 2009 when, after the September 2008 meltdown of the global financial markets, only one was booked.

The most obvious result of that hiccup was 2012 – the worst year in modern times for LNGC deliveries – when just three were commissioned.

Yet, by 2012 the LNG industry was rebounding as the US shale gas revolution, the Japanese nuclear disaster, buoyant demand for gas in China and high energy prices in Asia and Europe spurred decisions to build a wave of Australian and US natural gas liquefaction plants.

An unprecedented 228 LNG carriers were ordered over 48 months, from January 2011 to December 2014, many booked speculatively as euphoria swept the global gas market. At the time, there was no hint of today’s faltering economies and slack demand for gas.

Delivery of the 2011-2014 orderbook is now about one-third complete. The build-up of surplus tonnage in the LNGC fleet over the past 18 months has been exacerbated by the speculative newbuildings and by delays commissioning the liquefaction trains for which most were built.

The starts since January of the first Asia-Pacific LNG (APLNG), Sabine Pass and Gorgon liquefaction trains and the second Gladstone LNG (GLNG) train have helped to improve vessel employment somewhat but ship oversupply and depressed freight rates remain a problem.

Projects on hold

Low fossil fuel prices and depressed demand for gas are deterring investments in new LNG production. So far this year, eight planned projects have been delayed, put on hold or cancelled. Four are in Canada, where final investment decisions (FIDs) have been put on hold on Douglas Channel LNG, Triton LNG, LNG Canada and the planned liquefaction plant at Canaport import terminal.

Engie has halted its proposed Cameroon project while the mooted Oregon LNG scheme in the US has been abandoned. In floating LNG (FLNG), Exmar has terminated its agreement with Pacific Rubiales to deploy Caribbean FLNG in Colombia, Petronas has delayed until 2020, the completion and positioning of PFLNG2 off the coast of Sabah, Malaysia and Höegh LNG has suspended its FLNG project development activities.

Even small-scale projects have fallen prey to market conditions. Stolt said in January that it had postponed a scheme to build a 500,000-tonne liquefaction plant at Bécancour in Quebec, Canada.

The only FID in the last six months is the recent BP announcement that it will proceed with building a third 3.8 mta train at the Tangguh LNG plant in eastern Indonesia.

Latest newbuilds

And so, it is not surprising that orders for new LNG carriers have slowed to a trickle. The four ordered so far in 2016 comprise a pair of 180,000m3 ships ordered by SK Shipping at Hyundai Heavy Industries to lift Freeport LNG cargoes for SK E&S from 2018 and two 174,000m3 vessels that Maran Gas has contracted at Daewoo Shipbuilding and Marine Engineering. No specific employment has been announced for the latter pair, which are specified with two options.

Like most LNGCs contracted in 2014 and 2015, all four will be powered by a pair of low-speed, dual-fuel diesel engines. The Maran Gas ships will feature MAN high-pressure, gas-injection engines and the SK vessels will be propelled by low-pressure Wärtsilä XDF engines supplied by Winterthur Gas & Diesel (WinGD).

Controlling expenditure has added urgency in a poor freight market and propulsion systems offer considerable potential for cost savings. Of the gas-burning systems available to LNGC owners, low-speed, dual-fuel diesel engines are the most energy-efficient.

Plants under construction will bring 146 mta of new LNG production capacity on stream in 2016-2020. In addition, based on the anticipated employment routes of the ships in the current orderbook and on a moderate volume of older tonnage recycling, the LNG industry will require a further 30-40 newbuildings by 2019 to meet its growing shipping needs.

Most of these additional ships will be required for the later phases of US export projects now under construction. The orders for these ships will need to be placed by the end of 2017 to be completed in time. A split of 15 new orders in 2016 and 15 in 2017 is not unreasonable.

The FSRU factor

While low gas prices are discouraging investments in new liquefaction capacity, they are attracting more and more buyers of LNG imports. The quickest and most economical terminal solution for LNG purchasers in new locations is to use floating storage and regasification units (FSRUs).

In addition to the FSRU projects in operation and under construction worldwide, eight schemes that stand a good chance of coming to fruition have been tabled so far this year. The latest FSRU proposals are focused on South Asia, the Middle East and South America.

KGLNG is targeting an October 2017 start date for its 3.6 mta FSRU in Kakinada, India and 500km to south Petrogas is promoting a floating regas unit for Krishnapatnam, Andhra Pradesh. Reliance is seeking to develop a second Bangladeshi FSRU project and Pakistan GasPort has won a tender to provide a second FSRU for Port Qasim.

Abu Dhabi plans to have an FSRU in place by early next year and EGAS has launched a tender to hire Egypt’s third floating regas unit. In South America, Brazil plans to put the country’s fourth FSRU into service at Sergipe and Chile is set for a floater at Talcahuano, the country’s second FSRU and fourth LNG import terminal.

Strong interest in the floating regasification option makes it more likely that some speculative LNGCs now on order will be converted to FSRUs before their keels are laid. Golar and BW Gas, two owners that have FSRUs and speculative LNGCs on their orderbooks, have stated their readiness to deliver more FSRUs to meet industry requirements.

Other LNGC owners, including Teekay, Maran Gas, GasLog and Dynagas, have expressed interest in also joining the FSRU club, and some have been linked with proposed FSRU projects. These companies will either order FSRU newbuildings or convert open tonnage on their orderbooks to regas vessels.